Republic of the Philippines December 1963 was executed by PAGRICO,
SUPREME COURT Pacific Copra Export Inc. (PACOCO), Jose K.
Manila
FIRST DIVISION
G.R. No. L-47369 June 30, 1987
JOSEPH COCHINGYAN, JR. and JOSE K.
VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE
COMPANY, INC., respondent.
FELICIANO, J.:
This case was certified to us by the Court of and/or DISCHARGED." The Indemnity
Appeals in its resolution dated 11
November 1977 as one involving only
questions of law and, therefore, falling
within the exclusive appellate jurisdiction of
this Court under Section 17, Republic Act
296, as amended.
In November 1963, Pacific Agricultural
Suppliers, Inc. (PAGRICO) applied for and
was granted an increase in its line of credit
from P400,000.00 to P800,000.00 (the
"Principal Obligation"), with the Philippine
National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and
sufficient bond in the amount of
P400,000.00, representing the increment in
its line of credit, to secure its faithful
compliance with the terms and conditions
under which its line of credit was increased.
In compliance with this requirement,
PAGRICO submitted Surety Bond No. 4765,
issued by the respondent R & B Surety and
Insurance Co., Inc. (R & B Surety") in the
specified amount in favor of the PNB. Under
the terms of the Surety Bond, PAGRICO and
R & B Surety bound themselves jointly and
severally to comply with the "terms and
conditions of the advance line [of credit]
established by the [PNB]." PNB had the
right under the Surety Bond to proceed
directly against R & B Surety "without the
necessity of first exhausting the assets" of
the principal obligor, PAGRICO. The Surety
Bond also provided that R & B Surety's
liability was not to be limited to the
principal sum of P400,000.00, but would
also include "accrued interest" on the said
amount "plus all expenses, charges or
other legal costs incident to collection of
the obligation [of R & B Surety]" under the
Surety Bond.
In consideration of R & B Surety's issuance
of the Surety Bond, two Identical indemnity
agreements were entered into with R & B
Surety: (a) one agreement dated 23
December 1963 was executed by the
Catholic Church Mart (CCM) and by
petitioner Joseph Cochingyan, Jr, the latter
signed not only as President of CCM but
also in his personal and individual capacity;
and (b) another agreement dated 24
Villanueva and Liu Tua Ben Mr. Villanueva
signed both as Manager of PAGRICO and in
his personal and individual capacity; Mr. Liu
signed both as President of PACOCO and in
his individual and personal capacity.
Under both indemnity agreements, the
indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual
premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set
forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED
Agreements further provided:
(b) INDEMNITY: — TO indemnify the
SURETY COMPANY for any damage,
prejudice, loss, costs, payments,
advances and expenses of whatever
kind and nature, including [of]
attorney's fees, which the
CORPORATION may, at any time,
become liable for, sustain or incur as
consequence of having executed the
above mentioned Bond, its renewals,
extensions or substitutions and said
attorney's fees [shall] not be less
than twenty [20%] per cent of the
total amount claimed by the
CORPORATION in each action, the
same to be due, demandable and
payable, irrespective of whether the
case is settled judicially or
extrajudicially and whether the
amount has been actually paid or
not;
(c) MATURITY OF OUR OBLIGATIONS
AS CONTRACTED HEREWITH: — The
said indemnities will be paid to the
CORPORATION as soon as demand is
received from the Creditor or upon
receipt of Court order or as soon as it
becomes liable to make payment of
any sum under the terms of the
above-mentioned Bond, its renewals,
extensions, modifications or
substitutions, whether the said sum
or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY,
to accept in any case and at its entire
discretion, from any of us, payments
on account of the pending
obligations, and to grant extension to
any of us, to liquidate said
obligations, without necessity of
previous knowledge of [or] consent
from the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS
MADE BY THE COMPANY. — Any
payment or disbursement made by
the SURETY COMPANY on account of
 the above-mentioned Bonds, its Indemnity Agreement merely in order to
renewals, extensions or substitutions, make it appear that R & B Surety had
either in the belief that the SURETY complied with the requirements of the PNB
COMPANY was obligate[d] to make that credit lines be secured; (ii) was
such payment or in the belief that executed so that R & B Surety could show
said payment was necessary in order that it was complying with the regulations
to avoid greater losses or obligations of the Insurance Commission concerning
for which the SURETY COMPANY bonding companies; (iii) that R & B Surety
might be liable by virtue of the terms had assured him that the execution of the
of the above-mentioned Bond, its agreement was a mere formality and that
renewals, extensions or substitutions, he was to be considered a stranger to the
shall be final and will not be disputed transaction between the PNB and R & B
by the undersigned, who jointly and Surety; and (iv) that R & B Surety was
severally bind themselves to estopped from enforcing the Indemnity
indemnify the SURETY COMPANY of Agreement as against him.
any and all such payments as stated Petitioner Jose K. Villanueva claimed in his
in the preceding clauses. answer that. (i) he had executed the
xxx xxx xxx Indemnity Agreement in favor of R & B
When PAGRICO failed to comply with its Surety only "for accommodation purposes"
Principal Obligation to the PNB, the PNB and that it did not express their true
demanded payment from R & B Surety of intention; (ii) that the Principal Obligation of
the sum of P400,000.00, the full amount of PAGRICO to the PNB secured by the Surety
the Principal Obligation. R & B Surety made Bond had already been assumed by CCM
a series of payments to PNB by virtue of by virtue of a Trust Agreement entered into
that demand totalling P70,000.00 with the PNB, where CCM represented by
evidenced by detailed vouchers and Joseph Cochingyan, Jr. undertook to pay the
receipts. Principal Obligation of PAGRICO to the PNB;
(iii) that his obligation under the Indemnity
R & B Surety in turn sent formal demand Agreement was thereby extinguished by
letters to petitioners Joseph Cochingyan, Jr. novation arising from the change of debtor
and Jose K. Villanueva for reimbursement of under the Principal Obligation; and (iv) that
the payments made by it to the PNB and the filing of the complaint was premature,
for a discharge of its liability to the PNB considering that R & B Surety filed the case
under the Surety Bond. When petitioners against him as indemnitor although the
failed to heed its demands, R & B Surety PNB had not yet proceeded against R & B
brought suit against Joseph Cochingyan, Jr., Surety to enforce the latter's liability under
Jose K. Villanueva and Liu Tua Ben in the the Surety Bond.
Court of First Instance of Manila, praying
principally that judgment be rendered: Petitioner Cochingyan, however, did not
present any evidence at all to support his
b. Ordering defendants to pay jointly asserted defenses. Petitioner Villanueva did
and severally, unto the plaintiff, the not submit any evidence either on his
sum of P20,412.20 representing the "accommodation" defense. The trial court
unpaid premiums for Surety Bond No. was therefore constrained to decide the
4765 from 1965 up to 1968, and the case on the basis alone of the terms of the
additional amount of P5,103.05 Trust Agreement and other documents
yearly until the Surety Bond No. 4765 submitted in evidence.
is discharged, with interest thereon
at the rate of 12% per annum; [and] In due time, the Court of First Instance of
Manila, Branch 24 1 rendered a decision in
c. Ordering the defendants to pay favor of R & B Surety, the dispositive
jointly and severally, unto the plaintiff portion of which reads as follows;
the sum of P400,000.00 representing
the total amount of the Surety Bond Premises considered, judgment is
No. 4765 with interest thereon at the hereby rendered: (a) ordering the
rate of 12% per annum on the defendants Joseph Cochingyan, Jr.
amount of P70,000.00 which had and Jose K. Villanueva to pay, jointly
been paid to the Phil. National Bank and severally, unto the plaintiff the
already, the interest to begin from sum of 400,000,00, representing the
the month of September, 1966; total amount of their liability on
Surety Bond No. 4765, and interest at
xxx xxx xxx the rate of 6% per annum on the
Petitioner Joseph Cochingyan, Jr. in his following amounts:
answer maintained that the Indemnity On P14,000.00 from September 27,
Agreement he executed in favor of R & B 1966;
Surety: (i) did not express the true intent of
the parties thereto in that he had been On P4,000.00 from November 28,
asked by R & B Surety to execute the 1966;
 On P4,000.00 from December 14,
1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13,
1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14,
1967;
On P8,000.00 from November 28,
1967; and
On P8,000. 00 from February 26,
1968
until full payment; (b) ordering said
defendants to pay, jointly and
severally, unto the plaintiff the sum
of P20,412.00 as the unpaid
premiums for Surety Bond No. 4765,
with legal interest thereon from the
filing of plaintiff's complaint on
August 1, 1968 until fully paid, and
the further sum of P4,000.00 as and
for attorney's fees and expenses of
litigation which this Court deems just
and equitable.
There being no showing the
summons was duly served upon the
defendant Liu Tua Ben who has filed
no answer in this case, plaintiff's
complaint is hereby dismissed as
against defendant Liu Tua Ben
without prejudice.
Costs against the defendants Joseph
Cochingyan, Jr. and Jose K.
Villanueva.
Not satisfied with the decision of the trial
court, the petitioners took this appeal to
the Court of Appeals which, as already
noted, certified the case to us as one
raising only questions of law.
The issues we must confront in this appeal
are:
1. whether or not the Trust Agreement had
extinguished, by novation, the obligation of
R & B Surety to the PNB under the Surety
Bond which, in turn, extinguished the
obligations of the petitioners under the
Indemnity Agreements;
2. whether the Trust Agreement extended
the term of the Surety Bond so as to
release petitioners from their obligation as
indemnitors thereof as they did not give
their consent to the execution of the Trust
Agreement; and
3. whether or not the filing of this
complaint was premature since the PNB
had not yet filed a suit against R & B Surety
for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both
petitioners in their separate briefs, was
executed on 28 December 1965 (two years
after the Surety Bond and the Indemnity
Agreements were executed) between: (1)
Jose and Susana Cochingyan, Sr., doing
business under the name and style of the
Catholic Church Mart, represented by
Joseph Cochingyan, Jr., as Trustor[s]; (2)
Tomas Besa, a PNB official, as Trustee; and
(3) the PNB as beneficiary. The Trust
Agreement provided, in pertinent part, as
follows:
WHEREAS, the TRUSTOR has
guaranteed a bond in the amount of
P400,000.00 issued by the R & B
Surety and Insurance Co. (R & B) at
the instance of Pacific Agricultural
Suppliers, Inc. (PAGRICO) on
December 21, 1963, in favor of the
BENEFICIARY in connection with the
application of PAGRICO for an
advance line of P400,000.00 to
P800,000.00;
WHEREAS, the TRUSTOR has also
guaranteed a bond issued by the
Consolacion Insurance & Surety Co.,
Inc. (CONSOLACION) in the amount of
P900,000.00 in favor of the
BENEFICIARY to secure certain credit
facilities extended by the
BENEFICIARY to the Pacific Copra
Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the
PACOCO have defaulted in the
payment of their respective
obligations in favor of the
BENEFICIARY guaranteed by the
bonds issued by the R & B and the
CONSOLACION, respectively, and by
reason of said default, the
BENEFICIARY has demanded
compliance by the R & B and the
CONSOLACION of their respective
obligations under the aforesaid
bonds;
WHEREAS, the TRUSTOR is,
therefore, bound to comply with his
obligation under the indemnity
agreements aforementioned
executed by him in favor of R & B and
the CONSOLACION, respectively and
in order to forestall impending suits
by the BENEFICIARY against said
companies, he is willing as he hereby
agrees to pay the obligations of said
companies in favor of the
BENEFICIARY in the total amount of
P1,300,000 without interest from the
net profits arising from the
procurement of reparations consumer
goods made thru the allocation of
WARVETS; . . .
l. TRUSTOR hereby constitutes and
appoints Atty. TOMAS BESA as
 TRUSTEE for the purpose of paying to the change of either the person of the
the BENEFICIARY Philippine National debtor or of the creditor is described as
Bank in the manner stated subjective (or personal) novation. Novation
hereunder, the obligations of the R & may also be both objective and subjective
B under the R & B Bond No. G-4765 (mixed) at the same time. In both objective
for P400,000.00 dated December 23, and subjective novation, a dual purpose is
1963, and of the CONSOLACION achieved-an obligation is extinguished and
under The Consolacion Bond No. G- a new one is created in lieu thereof. 5
5938 of June 3, 1964 for P900,000.00 If objective novation is to take place, it is
or the total amount of P1,300,000.00 imperative that the new obligation
without interest from the net profitsexpressly declare that the old obligation is
arising from the procurement of thereby extinguished, or that the new
reparations consumer goods under obligation be on every point incompatible
the Memorandum of Settlement and with the old one. 6 Novation is never
Deeds of Assignment of February 2, presumed: it must be established either by
1959 through the allocation of the discharge of the old debt by the
WARVETS; express terms of the new agreement, or by
xxx xxx xxx the acts of the parties whose intention to
6. THE BENEFICIARY agrees to hold in dissolve the old obligation as a
abeyance any action to enforce its consideration of the emergence of the new
claims against R & B and one must be clearly discernible. 7
CONSOLACION, subject of the bond Again, if subjective novation by a change in
mentioned above. In the meantime the person of the debtor is to occur, it is
that this TRUST AGREEMENT is being not enough that the juridical relation
implemented, the BENEFICIARY between the parties to the original contract
hereby agrees to forthwith reinstate is extended to a third person. It is essential
the R & B and the CONSOLACION as that the old debtor be released from the
among the companies duly obligation, and the third person or new
accredited to do business with the debtor take his place in the new relation. If
BENEFICIARY and its branches, unless the old debtor is not released, no novation
said companies have been blacklisted occurs and the third person who has
for reasons other than those relating assumed the obligation of the debtor
to the obligations subject of the becomes merely a co-debtor or surety or a
herein TRUST AGREEMENT; co-surety. 8
xxx xxx xxx Applying the above principles to the instant
9. This agreement shall not in any case, it is at once evident that the Trust
manner release the R & B and Agreement does not expressly terminate
CONSOLACION from their respective the obligation of R & B Surety under the
liabilities under the bonds mentioned Surety Bond. On the contrary, the Trust
above. (emphasis supplied) Agreement expressly provides for the
continuing subsistence of that obligation by
There is no question that the Surety Bond stipulating that "[the Trust Agreement]
has not been cancelled or fully discharged 2
shall not in any manner release" R & B
by payment of the Principal Obligation. Surety from its obligation under the Surety
Unless, therefore, the Surety Bond has Bond.
been extinguished by another means, it
must still subsist. And so must the Neither can the petitioners anchor their
supporting Indemnity Agreements. 3 defense on implied novation. Absent an
unequivocal declaration of extinguishment
We are unable to sustain petitioners' claim of a pre-existing obligation, a showing of
that the Surety Bond and their respective complete incompatibility between the old
obligations under the Indemnity and the new obligation (and nothing else)
Agreements were extinguished by novation would sustain a finding of novation by
brought about by the subsequent execution implication. 9 But where, as in this case, the
of the Trust Agreement. parties to the new obligation expressly
Novation is the extinguishment of an recognize the continuing existence and
obligation by the substitution or change of validity of the old one, where, in other
the obligation by a subsequent one which words, the parties expressly negated the
terminates it, either by changing its object lapsing of the old obligation, there can be
or principal conditions, or by substituting a no novation. The issue of implied novation
new debtor in place of the old one, or by is not reached at all.
subrogating a third person to the rights of What the trust agreement did was, at most,
the creditor. 4 Novation through a change merely to bring in another person or
of the object or principal conditions of an persons-the Trustor[s]-to assume the same
existing obligation is referred to as obligation that R & B Surety was bound to
objective (or real) novation. Novation by perform under the Surety Bond. It is not
unusual in business for a stranger to a
contract to assume obligations thereunder;
a contract of suretyship or guarantee is the
classical example. The precise legal effect
is the increase of the number of persons
liable to the obligee, and not the
extinguishment of the liability of the first
debtor. 10 Thus, in Magdalena Estates vs.
Rodriguez, 11 we held that:
[t]he mere fact that the creditor
receives a guaranty or accepts
payments from a third person who
has agreed to assume the obligation,
when there is no agreement that the
first debtor shall be released from
responsibility, does not constitute a
novation, and the creditor can still
enforce the obligation against the
original debtor.
In the present case, we note that the
Trustor under the Trust Agreement, the
CCM, was already previously bound to R &
B Surety under its Indemnity Agreement.
Under the Trust Agreement, the Trustor
also became directly liable to the PNB. So
far as the PNB was concerned, the effect of
the Trust Agreement was that where there
had been only two, there would now be
three obligors directly and solidarily bound
in favor of the PNB: PAGRICO, R & B Surety
and the Trustor. And the PNB could proceed
against any of the three, in any order or
sequence. Clearly, PNB never intended to
release, and never did release, R & B
Surety. Thus, R & B Surety, which was not a
party to the Trust Agreement, could not
have intended to release any of its own
indemnitors simply because one of those
indemnitors, the Trustor under the Trust
Agreement, became also directly liable to
the PNB.
2. We turn to the contention of petitioner
Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963
Indemnity Agreement with R & B Surety
was extinguished when the PNB agreed in
the Trust Agreement "to hold in abeyance
any action to enforce its claims against R & immediately subrogated to the creditor's
B Surety .
The Indemnity Agreement speaks of the
several indemnitors "apply[ing] jointly and said to be entitled to protect himself
severally (in solidum) to the R & B Surety] against the principal debtor upon the
— to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB]
in the sum of [P400,000.00] for the faithful contingency of the principal debtor or the
compliance of the terms and conditions set indemnitors becoming insolvent during the
forth in said SURETY BOND — ." This part of extended period. The underlying rationale
the Agreement suggests that the
indemnitors (including the petitioners)
would become co-sureties on the Security
Bond in favor of PNB. The record, however,
is bereft of any indication that the
petitioners-indemnitors ever in fact became
co-sureties of R & B Surety vis-a-vis the
PNB. The petitioners, so far as the record
goes, remained simply indemnitors bound
to R & B Surety but not to PNB, such that
PNB could not have directly demanded
payment of the Principal Obligation from
the petitioners. Thus, we do not see how
Article 2079 of the Civil Code-which
provides in part that "[a]n extension
granted to the debtor by the creditor
without the consent of the guarantor
extinguishes the guaranty" could apply in
the instant case.
The petitioner-indemnitors are, as, it were,
second-tier parties so far as the PNB was
concerned and any extension of time
granted by PNB to any of the first-tier
obligators (PAGRICO, R &B Surety and the
trustors[s]) could not prejudice the second-
tier parties.
There is no other reason why petitioner
Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to
hold in abeyance any action to enforce its
claims" against R & B Surety did not extend
the maturity of R & B Surety's obligation
under the Surety Bond. The Principal
Obligation had in fact already matured,
along with that of R &B Surety, by the time
the Trust Agreement was entered into.
Petitioner's Obligation had in fact already
matured, for those obligations were to
amture "as soon as [R & B Surety] became
liable to make payment of any sum under
the terms of the [Surety Bond] — whether
the said sum or sums or part thereof have
been actually paid or not." Thus, the
situation was that precisely envisaged in
Article 2079:
[t]he mere failure on the part of the
creditor to demand payment after
the debt has become due does not of
itself constitute any extension of the
referred to herein.(emphasis
supplied)
The theory behind Article 2079 is that an
extension of time given to the principal
debtor by the creditor without the surety of
his right to pay the creditor and to be
remedies against the principal debtor upon
the original maturity date. The surety is
orginal maturity date. The surety is said to
be entitled to protect himself against the
is not present in the instant case. As this
Court has held,
merely delay or negligence in
proceeding against the principal will
not discharge a surety unless there is
between the creditor and the
principal debtor a valid and binding
agreement therefor, one which tends
 to prejudice [the surety] or to deprive
it of the power of obtaining indemnity
by presenting a legal objection for
the time, to the prosecution of an
action on the original security. 12
In the instant case, there was nothing to
prevent the petitioners from tendering
payment, if they were so minded, to PNB of
the matured obligation on behalf of R & B
Surety and thereupon becoming
subrogated to such remedies as R & B
Surety may have against PAGRICO.
3. The last issue can be disposed of quicjly,
Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B
Surety to recover from petitioners even
before R & B Surety shall have paid the
PNB. We have previously held similar
indemnity clauses to be enforceable and
not violative of any public policy. 13
The petitioners lose sight of the fact that
the Indemnity Agreements are contracts of
indemnification not only against actual loss
but against liability as well. 14 While in a
contract of indemnity against loss as
indemnitor will not be liable until the
person to be indemnified makes payment
or sustains loss, in a contract of indemnity
against liability, as in this case, the
indemnitor's liability arises as soon as the
liability of the person to be indemnified has
arisen without regard to whether or not he
has suffered actual loss. 15 Accordingly, R
& B Surety was entitled to proceed against
petitioners not only for the partial
payments already made but for the full
amount owed by PAGRICO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by
the Trust Agreement. Both agreements can
co-exist. The Trust Agreement merely
furnished to PNB another party obligor to
the Principal Obligation in addition to
PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in
abeyance any action to enforce its claim"
against R & B Surety did not amount to an
"extension granted to the debtor" without
petitioner's consent so as to release
petitioner's from their undertaking as
indemnitors of R & B Surety under the
INdemnity Agreements; and
(3) Petitioner's are indemnitors of R & B
Surety against both payments to and
liability for payments to the PNB. The
present suit is therefore not premature
despite the fact that the PNB has not
instituted any action against R & B Surety
for the collection of its matured obligation
under the Surety Bond.
WHEREFORE, the petitioner's appeal is
DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-
Herrera, Cruz, Gancayco and Sarmiento, JJ.,
concur.
Footnotes
1 With then Judge Ricardo C.
Puno presiding.
2 R & B Surety had earlier
made partial payments thereon
to PNB.
3 Manila Surety & Fidelity Co. v.
Villarama, 107 Phil. 891, 899
(1960).
4 De Cortes v. Venturanza, 79
SCRA 709, 722-23 (1977).
5 Id at 723.
6 Zapanta v. Rotaeche, 21 Phil.
154, 159 (1912).
7 E.g., Tui Siuco v. Habana, 45
Phil. 707, 713 (1924); Martinez
v. Cavives, 25 Phil. 581 (1913).
8 Dungo v. Lopena, 6 SCRA
1007,1015-16 (1962).
9 Guerrero v. Court of Appeals,
29 SCRA 791, 798 (1969).
10 Dungo v. Lopena, 6 SCRA
1007, at 1016 (1962).
11 18 SCRA 967, at 972 (1966).
12 Bank of the Philippine
Islands v. Albaladejo y
Compania, 53 Phil. 141, at 145-
146 (1929); underscoring
supplied.
13 Security Bank v. Globe
Assurance, 58 Off. Gaz. 3708
(30 April 1962); Cosmopolitan
Insurance v. Reyes, 15 SCRA
258, 261 (1965); Alto Surety v.
Aguilar, G.R. No. L-5625, March
16, 1954.
14 Guerrero v. Court of
Appeals, 29 SCRA 791, 797
[1969], this case involves an
indemnification clause similar
to the INdemnity Agreements
under consideration. See also
Alto Surety & Insurance Co. v.
Aguilar, L-5625, March 16,
1954.
15 Guerrero v. Court of
Appeals, 29 SCRA 791 (1969);
Associated Insurance & Surety
Co. v. Chua, 7 SCRA 52, 54
(1963); Alto Surety & Insurance
Co. v. Andan, 100 Phil. 403, 406
(1956).